New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Meridian Energy</h2>
Breaking Records is Becoming a Broken Record — 1H20 Result Review
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185&nbsp;
NEUTRAL
It probably shouldn’t come as any surprise that Meridian Energy (MEL) has once again reported record breaking 1H20 EBITDAF of $465m, +20% higher than the pcp and +4% higher than 2H19. It is MEL’s third consecutive record six-monthly EBITDAF. However, overhanging MEL’s commentary, and actions is NZAS uncertainty. MEL has kept its interim dividend flat for that reason despite the record result.
What's changed
<ul type="disc">
<li>EBITDAF&nbsp;forecasts:&nbsp;FY20/FY21/FY22 +$1m/-$1m/+$2m to $864m/$807m/$808m</li>
<li>Target price and rating:&nbsp;Unchanged at $4.40 and NEUTRAL respectively</li>
</ul>
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">MEL</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$5.09</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">481.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">500.9</td>
<td style="text-align: left; width: 43.2pt;">450.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">450.9&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">17.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">16.8</td>
<td style="text-align: left; width: 48pt;">18.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">18.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$4.40</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">18.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">19.5&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">17.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">17.6&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">25.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">26.5</td>
<td style="text-align: left; width: 48pt;">29.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">29.2&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">Low</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">33.4</td>
<td style="text-align: left; width: 42.6pt;">4.1</td>
<td style="text-align: left; width: 43.2pt;">-10.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">27.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">26.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">28.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">28.9&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">2563.0m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">21.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">21.5&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">21.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">21.2&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">2.4</td>
<td style="text-align: left; width: 42.6pt;">2.5</td>
<td style="text-align: left; width: 48pt;">2.7</td>
<td style="text-align: left; width: 42.6pt;">2.8&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$13,046m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">66</td>
<td style="text-align: left; width: 42.6pt;">65</td>
<td style="text-align: left; width: 43.2pt;">65</td>
<td style="text-align: left; width: 48pt;">70</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">4.2</td>
<td style="text-align: left; width: 42.6pt;">4.2</td>
<td style="text-align: left; width: 48pt;">4.2</td>
<td style="text-align: left; width: 42.6pt;">4.2</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">1,537k (NZ$7,230k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">5.3</td>
<td style="text-align: left; width: 42.6pt;">5.3</td>
<td style="text-align: left; width: 48pt;">5.3</td>
<td style="text-align: left; width: 42.6pt;">5.3</td>
</tr>
</tbody>
</table>
Breaking&nbsp;EBITDAF&nbsp;records is getting monotonous
The wholesale market conditions keep providing for MEL. Record 1H hydro and wind generation volumes, above average wholesale electricity prices (albeit below the pcp) and a free run at the commercial market have all contributed to NZ EBITDAF increasing +22% vs. the pcp to $426m. In contrast to New Zealand, Australia’s EBITDAF contribution ($39m) was flat (-$2m) on the pcp, with drought conditions impacting generation volumes. The result contained no surprises.
Sufficient momentum to post an FY20 record, but don't expect the records to continue
We have left our forecasts largely unchanged. Our FY20 EBITDAF forecast of $864m is +3% higher than the pcp. To achieve that result requires MEL to report 2H20 EBITDAF of $399m, -$50m lower than 2H19. Whilst there are some challenges in 2H20, $864m is very achievable and would be the eighth consecutive year of FY EBITDAF growth — a remarkable achievement for a supposedly volatile business. Longer-term, we expect the wholesale electricity market to normalise, Contact Energy to re-enter the commercial market and a lower electricity price to NZAS. Partially offsetting those headwinds are reducing transmission costs and modest growth in Australia, such that our estimate of MEL’s normalised hydrology EBITDAF is ~$800m. However, with MEL trading on an FY21 EBITDAF multiple ~+30% higher than its peers, we retain our NEUTRAL rating.
NZAS delays planned announcements around dividend and potentially Hawkes Bay wind
Overhanging everything MEL does at present is&nbsp;NZAS. Its interim dividend of 8.14cps (including 2.44cps capital management special dividend) is flat on the&nbsp;pcp&nbsp;despite record breaking earnings. In addition, MEL had originally intended to update the market on a revised dividend policy post-1H22 when the current capital management programme ends. That has been deferred. In addition, the final investment decision on its&nbsp;Harapaki&nbsp;wind project in&nbsp;Hawkes&nbsp;Bay will not be made until mid-2020.

Meridian Energy
Breaking Records is Becoming a Broken Record — 1H20 Result Review
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185&nbsp;
NEUTRAL
It probably shouldn’t come as any surprise that Meridian Energy (MEL) has once again reported record breaking 1H20 EBITDAF of $465m, +20% higher than the pcp and +4% higher than 2H19. It is MEL’s third consecutive record six-monthly EBITDAF. However, overhanging MEL’s commentary, and actions is NZAS uncertainty. MEL has kept its interim dividend flat for that reason despite the record result.
What's changed

EBITDAF&nbsp;forecasts:&nbsp;FY20/FY21/FY22 +$1m/-$1m/+$2m to $864m/$807m/$808m
Target price and rating:&nbsp;Unchanged at $4.40 and NEUTRAL respectively

         


NZX Code
MEL
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$5.09
NPAT* (NZ$m)
481.3&nbsp;
500.9
450.8&nbsp;
450.9&nbsp;
EV/EBITDA
17.3&nbsp;
16.8
18.1&nbsp;
18.1&nbsp;


Target price
NZ$4.40
EPS* (NZc)
18.8&nbsp;
19.5&nbsp;
17.6&nbsp;
17.6&nbsp;
EV/EBIT
25.8&nbsp;
26.5
29.5&nbsp;
29.2&nbsp;


Risk rating
Low
EPS growth* (%)
33.4
4.1
-10.0&nbsp;
0.0&nbsp;
PE
27.1&nbsp;
26.0&nbsp;
28.9&nbsp;
28.9&nbsp;


Issued shares
2563.0m
DPS (NZc)
21.3&nbsp;
21.5&nbsp;
21.5&nbsp;
21.2&nbsp;
Price/NTA
2.4
2.5
2.7
2.8&nbsp;


Market cap
NZ$13,046m
Imputation (%)
66
65
65
70
Cash div yld (%)
4.2
4.2
4.2
4.2


Avg daily turnover
1,537k (NZ$7,230k)
*Based on normalised profits


Gross div yld (%)
5.3
5.3
5.3
5.3



Breaking&nbsp;EBITDAF&nbsp;records is getting monotonous
The wholesale market conditions keep providing for MEL. Record 1H hydro and wind generation volumes, above average wholesale electricity prices (albeit below the pcp) and a free run at the commercial market have all contributed to NZ EBITDAF increasing +22% vs. the pcp to $426m. In contrast to New Zealand, Australia’s EBITDAF contribution ($39m) was flat (-$2m) on the pcp, with drought conditions impacting generation volumes. The result contained no surprises.
Sufficient momentum to post an FY20 record, but don't expect the records to continue
We have left our forecasts largely unchanged. Our FY20 EBITDAF forecast of $864m is +3% higher than the pcp. To achieve that result requires MEL to report 2H20 EBITDAF of $399m, -$50m lower than 2H19. Whilst there are some challenges in 2H20, $864m is very achievable and would be the eighth consecutive year of FY EBITDAF growth — a remarkable achievement for a supposedly volatile business. Longer-term, we expect the wholesale electricity market to normalise, Contact Energy to re-enter the commercial market and a lower electricity price to NZAS. Partially offsetting those headwinds are reducing transmission costs and modest growth in Australia, such that our estimate of MEL’s normalised hydrology EBITDAF is ~$800m. However, with MEL trading on an FY21 EBITDAF multiple ~+30% higher than its peers, we retain our NEUTRAL rating.
NZAS delays planned announcements around dividend and potentially Hawkes Bay wind
Overhanging everything MEL does at present is&nbsp;NZAS. Its interim dividend of 8.14cps (including 2.44cps capital management special dividend) is flat on the&nbsp;pcp&nbsp;despite record breaking earnings. In addition, MEL had originally intended to update the market on a revised dividend policy post-1H22 when the current capital management programme ends. That has been deferred. In addition, the final investment decision on its&nbsp;Harapaki&nbsp;wind project in&nbsp;Hawkes&nbsp;Bay will not be made until mid-2020.

Meridian Energy: Breaking Records Is Becoming a Broken Record — 1H20 Result Review